Human Genome Lays Out Its Valuation Case

Human Genome Sciences' (NAS: HGSI) conference call yesterday was scheduled to go over the biotech's first-quarter earnings, but with the unsolicited bid from partner GlaxoSmithKline (NYS: GSK) last week, management figured it would be a good venue to state its case. It's not often you hear a CEO on an earnings call say, "We do not plan to take you through the financial results in today's call."

What's really interesting is that I don't think the target of the sales pitch was Glaxo or even another potential suitor. Glaxo can already value Human Genome Sciences pretty well, since the two are partners on most of Human Genome's drugs. And any other potential buyer would want more information than Human Genome Sciences would be willing to give in a conference call.

Instead, I think the talk was targeted at shareholders. Management needs their support through the sales process, because it's a lot easier to justify a takeout in the $16- to $17-per-share range with shareholders valuing it over $14 per share. If shareholders lose faith that a higher bid will come, shares will drop back down below Glaxo's $13 offer -- assuming it's still interested.

So is Human Genome Sciences worth more than what Glaxo is willing to pay? Probably, but some more data points would make things easier. Most of the value in Human Genome Sciences is tied up in its lupus drug, Benlysta. The drug has had a slow start, but that's somewhat to be expected for a disease that isn't life-threatening for most patients. Doctors can try it on a few patients and see how it works before prescribing it to more of their patients.

And that's exactly what seems to be happening. More than 1,000 accounts have prescribed Benlysta, but only 211 accounts in the first quarter prescribed it to five or more patients in a month. The number of accounts using the drug in that many patients is increasing rapidly; in the first quarter it was 42% higher than in the fourth quarter, although the comparator was probably a little hampered by the holidays. Even if it slows down to around 30% quarter-over-quarter growth -- the average for the past two quarters -- Human Genome and Glaxo will be able to capture the other 80% still in the try-it-out phase soon enough. And there are still another 1,000 accounts or so to move through the process.

Benlysta looks to be on its way to becoming a success, but that's the same thing we said about Dendreon's (NAS: DNDN) Provenge before it hit its wall. With the unknown risk, I think there are a lot of outside acquirers that will pass on making a bid until there are a few more data points on the upward adoption. That leaves Human Genome left to try to convince Glaxo to up its lowball bid.

When the offer was made last week, I wrote, "I don't see much reason to buy at this point." With another quarter of Benlysta sales headed in the right direction, there's more reason to buy, but Human Genome remains a risky play, since its near-term value will be determined by the whim of executives' M&A desires rather than the ability of the company to execute its sales plan.